I was recently offered the opportunity to find a buyer for a family company that five years earlier had been passed from the founder to his four children. For the last couple of years the company had struggled. The difficult economy had taken its toll, and reduced profits were causing friction with two of the siblings who were not working in the business. One of the non-working shareholders had been through an expensive divorce and now wanted the other shareholders to buy her out. The business was not making enough money to fund a buyout so a decision had been made to explore a sale.
After meeting with the shareholders in the company's wood-paneled boardroom we decided not to take the project on. There was a huge variation in motive, price expectation and emotional commitment to the business amongst the shareholders, and I just couldn't see them agreeing on an offer. The meeting with the shareholders did however set me thinking - Just what are the pros and cons of transferring a business to the children?
For many owners keeping the business in the family is a decision driven by emotional preference rather than commercial logic. It certainly avoids the expense, disruption and stress of a company sale process. If the children have the ability, drive and personal compatibility to run and grow the company it can also provide a better standard of living than paid employment. These are genuine benefits to keeping a company in the family, but I have seen enough failed transfers to know that there are some genuine risks as well.
The first and most basic rule of wealth management is to build a diverse portfolio to spread risk. Passing the company on could well result in an unhealthy concentration of wealth in one asset. Some founders solve this problem by requiring the younger generation to buy them out, but the resulting cash drain on the company can hobble growth for years.
Hard as it may be the founder has to find a way to take a dispassionate view of his children's ability to grow the company. Could I do this? I'm really not sure. You also need to be sure that running the business is what the children really want to do. Successful owners have a passion for the business, not a sense of obligation.
Building a business takes independence of mind and belief in your own judgement. These are not character traits that make it easy to let go. Will you really be able to manage this? It is likely that at least one of your children will have inherited these qualities. Inter-generational strife can quickly sap energy and leave the business without a sense of direction.
Is the business in need of fresh ideas or an injection of capital to take it forward? Children that have grown up in the business may not be the best source of a change of direction. New owners may be better placed to invest in taking the business forward.
I can understand the emotional attraction of passing a company on to the next generation. Experience tells me that it is not the right decision in every case. It might well only be the right decision for a small minority of families.
Robert John Kemp is Managing Director of UK Business Broker Select Business Sales.
Select Business Sales are specialists in retirement sales of private companies. Our active approach quickly connects clients with the buyers in the best position to complete a purchase.
After meeting with the shareholders in the company's wood-paneled boardroom we decided not to take the project on. There was a huge variation in motive, price expectation and emotional commitment to the business amongst the shareholders, and I just couldn't see them agreeing on an offer. The meeting with the shareholders did however set me thinking - Just what are the pros and cons of transferring a business to the children?
For many owners keeping the business in the family is a decision driven by emotional preference rather than commercial logic. It certainly avoids the expense, disruption and stress of a company sale process. If the children have the ability, drive and personal compatibility to run and grow the company it can also provide a better standard of living than paid employment. These are genuine benefits to keeping a company in the family, but I have seen enough failed transfers to know that there are some genuine risks as well.
The first and most basic rule of wealth management is to build a diverse portfolio to spread risk. Passing the company on could well result in an unhealthy concentration of wealth in one asset. Some founders solve this problem by requiring the younger generation to buy them out, but the resulting cash drain on the company can hobble growth for years.
Hard as it may be the founder has to find a way to take a dispassionate view of his children's ability to grow the company. Could I do this? I'm really not sure. You also need to be sure that running the business is what the children really want to do. Successful owners have a passion for the business, not a sense of obligation.
Building a business takes independence of mind and belief in your own judgement. These are not character traits that make it easy to let go. Will you really be able to manage this? It is likely that at least one of your children will have inherited these qualities. Inter-generational strife can quickly sap energy and leave the business without a sense of direction.
Is the business in need of fresh ideas or an injection of capital to take it forward? Children that have grown up in the business may not be the best source of a change of direction. New owners may be better placed to invest in taking the business forward.
I can understand the emotional attraction of passing a company on to the next generation. Experience tells me that it is not the right decision in every case. It might well only be the right decision for a small minority of families.
Robert John Kemp is Managing Director of UK Business Broker Select Business Sales.
Select Business Sales are specialists in retirement sales of private companies. Our active approach quickly connects clients with the buyers in the best position to complete a purchase.
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